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Opinions of Thursday, 27 May 2021

Columnist: Kwabena Adu Koranteng

The strength and weaknesses of investing in Bitcoin in Africa

File photo: Cryptocurrency File photo: Cryptocurrency

According to MX.com, Bitcoin is primarily, a significant event in computer science. For a long time, computer scientists and cryptographers have reached for a digital currency or a “digital gold.” It’s been written about in science fiction, and there’s been a large body of work on how to create it.

In 2009 Satoshi Nakamoto, the anonymous creator of Bitcoin, published a white paper about his research, pulling together existing concepts that could facilitate an online currency in a fair way.

Bitcoin is the digital currency that utilizes cryptocurrency and it is controlled by the decentralized authority which is not like the government-issued currencies whereas the Cryptocurrency refers to the technology that acts as a medium for facilitating the conduct of the different financial transactions which are safe and secure.

The currency is profound in the way it behaves as a decentralized public ledger, which allows people to probably and fairly track assets around the globe. Nobody can manipulate the transactional ledger without everybody else realizing it, which means it’s a fair way for people to exchange things.

Additionally, the rules are all consensus based, so the system is held accountable by all of the users.

This feature ensures the integrity of the system and allows it to be improved upon if the improvements are in the interest of the general public. We’ve seen a number of those improvements so far, and developers continue to fasten on interesting new features to Bitcoin every couple of weeks. It’s a living code base.

By use of the public ledger people can exchange units, or credits, called Bitcoins. They’re representative of value because the ruleset dictates that they’re scarce, and there’s a fixed supply of them. This allows for international remittance — a global currency, where somebody in Australia can convert their local currency into Bitcoin, send it to their relatives in London (or in the U.S., or in China, or wherever), and then that relative can convert it back into the local fiat currency.

The conversion rates are much lower than what we have traditionally seen, and there’s no counter party — no intermediary that can restrict the flow of funds or impose unreasonable costs to moving those funds. That’s remarkable from a remittance standpoint, and that’s one of the more disruptive features of the currency at this time.

Another facet that’s interesting about Bitcoin is how all transactions that occur in the network are logged in this thing called the blockchain, which is effectively a control system that allows us to see a history of all the transactions in real time.

We can see them moving across the world, which is useful for auditing. But it can also be used to track the history of a certain token or a certain asset. For example, if we were to tokenize cotton, we could see how certain units of cotton could move through a local supply chain into a final product.
That’s advantageous for many reasons to many different interest groups; it’s something that’s long been sought after.

So, there are all these interesting facets of Bitcoin that have huge implications, but primarily it’s used as a global currency.

Why is Crypto Adoption Growing in Africa?

According to FINSME, Africa is going through an economic revolution never seen before. Interestingly, the process has nothing to do with outdated economic policies or commercial banks-enabled transactions but virutual currency adoption. Africa has already adopted mobile money. experts predict that the market is ripe for another wide adoption of crypto.

Reuters in September 2020 reported that cryptocurrency transfers reached a peak of USD 316 million last June. Three countries that account for most of the transactions are Nigeria, South Africa, and Kenya.

What is unique is crypto for commercial transactions, unlike other parts of the world, where cryptocurrencies are used mainly for financial trading.

1. Growth in remittances:

A big part of income for many African countries is remittances from diaspora abroad. According to World Bank, remittance flows to sub-Saharan Africa for 2019 were close to USD 48 billion.

The World Bank report also states that it is costlier to send money in sub-Saharan Africa than most other regions. On average, a sender occurs an 8.9% cost to send money to their home country. On the other hand, the global average for the same stands at 6.8%.

2. Currency Devaluations in Africa
In the last decade or so, many African countries have gone into an economic tantrum with skyrocketing inflation and devaluation of national currencies.
For instance, the World Bank reported that South Sudan’s inflation rate was roughly 102% between 2016 and 2017. Other countries facing higher inflation & currency devaluations included Nigeria, Zambia, Ghana, Kenya, Mozambique, and Zimbabwe.

It shouldn’t be surprising to find out some of the biggest crypto economies are also these countries. The primary drivers of the African bitcoin economy are Ghana, Kenya, Nigeria, South Africa, and Botswana.

Just five years back, when Zimbabwe was facing hyperinflation, some young Zimbabweans turned to Bitcoin. Similarly, many people from Nigeria, Kenya, and others joined the cryptocurrency bandwagon. They saw virtual currencies as a safer means to transact and avoid their inflated currencies or store value against USD as compared to their national currency.

The major example of this is Nigeria, where is the crypto adoption is one of the highest in the world.

According to a survey report of Statista, Nigeria ranked first, with 32% of people saying either they have used or owned the cryptocurrency.

Although Nigeria has been recovering from recession rapidly, the economic woes continue for Nigerians. The global pandemic COVID-19 further aggravated the situation. Last year, the Central Bank of Nigeria devalued Naira by 24%, prompting citizens to look for other alternative income sources.

The cryptocurrency trading and use of bitcoins for transactions seemed attractive to many Nigerians. Moreover, many businesses have added crypto plugins to make phone payment options.

3. Similarities to Mobile Money
Another major reasons why Africa has high crypto adoption is said to be the lack of banking infrastructure.

Mobile money platforms such as MPesa have helped provide banking access to millions of Kenyans in the last few years. People not having access to traditional banking systems in rural areas in Kenya use digital platforms to transact.

It is no surprise why cryptocurrency has become attractive to many Africans, who are already familiar with concept of digital money wallets, according to financial experts.

The Challenges

1. Not a value store

Cryptocurrency is not without its challenges. Firstly, Bitcoin and others are not legal tenders in many African countries; many African central banks have clarified multiple times.

That means there is no safety valve if you lose from your crypto account. Converting local currencies into bitcoin is a complex process, often mediated by informal brokers.

Apart from being largely unregulated, cryptocurrency is very volatile in nature. Short-term investors are at risk of losing a hefty amount due to a downfall in crypto values.

For instance, the value of a bitcoin has skyrocketed since June 2020.

2019 to 2021 has been a remarkable period of growth for cryptocurrencies, especially bitcoin. The above line graph shows how one bitcoin’s value from USD 3500 has now reached close to USD 60,000. But this is half the story. Bitcoin values often plunged by 10% or more in quick succession, which can be detrimental for small investors in Africa.

Multiple factors make cryptocurrencies highly risky as a value store:

a. Bitcoin valuation
How do you determine a value of a share? – by looking at financial reports, balance sheets, income statements, and so on. But how about a bitcoin? There is no actual data to wrap your head around. There are only transaction sentiments that fuel the value of a bitcoin.

b. Utility or Usage problem

There are roughly 18.51 million Bitcoins in circulation, but only few investors hold almost 40% of the total supply. This means that a few million Bitcoin are actually available for transactions, which is relatively small compared to the global GDP, making it difficult to be used for transactions as per some experts.

Still, only a few businesses accept virtual currencies as payment.
c. The bubble can burst

There is always a risk of rapidly rising investment bubbles eventually burst. History suggests that every volatile asset has a higher risk of losing. Compared to other forms of investments, bitcoin is a highly volatile and risky investment that is not backed by anything & driven by sentiment.

2. Financial scams
According to Trade Forex Kenya, most of the people in Kenya, Nigeria & other African countries are interested in cryptos because they see them as a lucrative investment with high potential returns.

Many Africans easily fall for scams such as MMM, that promise high returns & regular income. There has been a significant rise in number of fake crypto trading & similar scam websites that promise returns in the name of crypto & other financial investments.

Central Bank of Nigeria (CBN) issued statement that cryptocurrencies are increasingly being used for money laundering and other illegal activities.

People with no experience in blockchain technology or understanding of cryptocurrencies are at a higher risk of falling prey to crypto-scams or investing through the wrong channels.

It’s easier for people with some background in technology, but a vast section of African crypto traders is attracted towards lucrative returns rather than underlying technology.

There are currently no regulators for cryptocurrency in most countries, and this poses a severe risk for ordinary investors. There is no escape route or way of getting the money back once the virtual currency crashes or there is some scam.

Regulatory Concerns
BANK OF GHANA NOTICE TO BANKS AND SPECIALIZED DEPOSIT-
TAKING INSTITUTIONS


This is what the Bank of Ghana said regarding the bitcoin and crypto currencies.

‘The Bank of Ghana has taken notice of recent developments in the use, holding, and trading of virtual or digital currencies (also known as cryptocurrencies), such as Bitcoin in Ghana.

The Bank of Ghana wishes to notify the general public that these activities in digital currency are currently not licensed under the Payments System Act 2003 (Act 662). The Bank of Ghana is currently investing a lot of resources to further enhance the payments and settlements system, including digital forms of money and also to introduce cyber security guidelines to safeguard electronic and online financial transactions.

A revised Payments System Act referred to as Payment Systems and Services Bill will be considered by Parliament within the next couple of months. This revision should bring the electronic payments space up to date to international standards and aligned with the evolving ecteronic payments landscape.

While the Bank of Ghana acknowledges the enormous potential in the blockchain technology and how that can significantly transform the payments system landscape and promote financial inclusion, we are assessing with stakeholders and other international partners how the subsequent use of the blockchain technology into digital currencies would fit into the global financial and payments architecture.

The public is therefore strongly encouraged to do business with only institutions licensed by the Bank of Ghana to ensure that such transactions fall under our regulatory purview.

For the avoidance of doubt, the public can always consult our website (www.bog.gov.gh) for a list of licensed bank sand non-bank financial institutions in Ghana.

The Bank of Ghana assures the general public of its continuous efforts to safeguard the stability and soundness of the financial sector. (Sgd.)CAROLINE OTOO (MRS) THE SECRETARY22ndJanuary, 2018.

Many regulators see cryptocurrencies as an economic risk to their country.
In Feb 2021, the Nigerian Central Bank instructed the commercial banks and other financial institutions to close accounts dealing in currencies, citing cryptocurrency as a threat to the Nigerian financial system.

It has some truths because there is no way to find where the cryptocurrency originated; anonymity is a big concern for regulatory authorities worldwide.

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